Good day and welcome to the Select Income REIT Fourth Quarter and Year-End 2012 Financial Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions I would like to turn the call over to the Vice President of Investor Relations Mr. Tim Bonang.Please go ahead sir.

Tim Bonang

Thank you and good afternoon. Joining me on today's call are, David Blackman, President and Chief Operating Officer and John Popeo, Treasurer and Chief Financial Officer. The agenda for today's call includes a presentation by management followed by a question-and-answer session. I would note that the recording and retransmission of today’s conference call is strictly prohibited without the prior written consent of the company.

Before we begin today's call, I would like to read our Safe Harbor statement. Today’s conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on SIR’s present beliefs and expectations as of today, February 22, 2013. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today’s conference call other than through filings with the Securities and Exchange Commission or SEC regarding this reporting period.

In addition, this call may contain non-GAAP numbers including funds from operations or FFO. A reconciliation of FFO to net income and the components to calculate cash available to distribution or CAD are available in our supplemental operating and financial data package found on our website at www.sirreit.com.

Actual results may differ materially from those projected in any forward-looking statements. Additional information concerning factors that could cause those differences is contained in our filings with the SEC. Investors are cautioned not to place undue reliance upon any forward-looking statements.

And now I would like to turn the call over to David Blackman.

David Blackman

Thank you, Tim. Select Income REIT has been a public company for only three full quarters. Since we don’t have full year of operations to review I am going to use this time to review how we have performed as a public company relative to our IPO investment thesis.

Overall SIR’s income stream remains well secured. At the time of the IPO, SIR owned 251 properties containing 21.4 million square feet that were 95.3% leased to 224 tenants for a weighted average remaining lease term of 12.2 years. As of December 31, 2012, SIR owned 267 properties containing 24.6 million square feet that were also 95.3% leased to 253 tenants per weighted average remaining lease term of 11.7 years. SIR remains a company focused on owning net leased properties and we have no material lease expirations with our Mainland properties until 2015. In fact, across the entire portfolio, only 1.8%, 0.7% and 3.6% of our aggregate annualized rents are subject to lease expiration in 2013, 2014, and 2015 respectively. In addition, Hawaii continues to be our largest market for investment representing 52.8% of our annualized rents at year-end.

Our product metrics are consistent with other investment grade REITs. Upon completion of our IPO, SIR’s total debt-to-total book capitalization was 24.6% and we had no property level secured debt. In December, we raised at net proceeds of $183 million through the sale of common shares, resulting in a year-end total debt-to-total book capitalization of 34.4%. We have property levels secured debt equal to 2% of total book capitalization and EBITDA covered interest expense 8.6 times.

SIR also completed a $350 million unsecured term loan in July, 2012 and increased our $500 million unsecured revolving credit facility to $750 million in February, 2013, which further demonstrates our access to capital. Unlike many net lease companies, we believe SIR has a compelling internal growth story with the ability to grow revenue in Hawaii through rent resets and leasing.

During 2012, SIR executed rent resets on 547,000 square feet and increased annualized rents for these leases by 54% on average. SIR also executed new and renewal leases during 2012 for 994,000 square feet and increased annualized rents for these leases on 23% on average. Our organic growth through Hawaii rent resets and leasing will remain a compelling story in 2013, as 2013 has the largest number of rent resets in any year since our predecessors made its first investment in Hawaii 10 years ago.

Finally, our external growth through acquisition has been compelling and has exceeded our expectations. Since closing our IPO, SIR has acquired 18 properties containing 3.7 million square feet for $543 million. The average purchase price per square foot for these acquisitions was $144. The weighted average remaining least term was 12.7 years. The weighted average occupancy was 100% and the average acquisition cap rate was 9.2%. Included in these acquisitions was a small acquisition in Hawaii of $6.3 million at a purchase price per land square foot of $129 which we believe provides meaningful insight into the value of our land in [Tunapuna] and Sand Island. As a result we’re having a securing constraint, our organic growth and our accretive acquisition activity we were able to increase our annual distribution rate by $0.08 per share during 2012.

Now let’s review our results for fourth quarter and activity since the third quarter. For the first quarter of 2012, SIR’s reported normalized FFO $23.6 million or $0.71 per share compared to normalized FFO of $20.1 million for the fourth quarter of 2011. We had no shares outstanding during the fourth quarter of 2011.

In December, we sold 8,050,000 common shares and raised $183 million in net proceeds to repay debt and fund acquisitions. In January, we declared a distribution of $0.42 per share and in February we increased our $500 million unsecured revolving credit facility to $750 million.

During the quarter, we executed nine new and renewal leases for 434,000, square feet with a weighted average lease term at 9.6 years for our roll up in rent of 35%. We also executed 10 rent resets for 365,000, square feet for a roll up in rent of almost 60%.

Leasing capital was a modest $323,000 or $0.08 per square foot per lease year and a 100% of our leasing and rent reset activity was in Hawaii. Since October 1st we have acquired nine properties containing 1.2 million square feet for an aggregate purchase price of $282.4 million excluding acquisition costs. The average purchase price per square foot for these acquisitions was $228.

The average acquisition cap rate was 8.5% and the weighted average remaining lease term was 11.7 years. We also entered into agreement to acquire three properties containing 225,000 square feet for $53.3 million excluding acquisition costs. The purchase of these properties is subject to our satisfactory completion of due diligence and other closing conditions so we can provide no assurance that properties under agreement will actually close.

In November, we acquired a single tenant net lease office property located in Sunnyvale, California containing 96,000 square feet. The property was a 100% leased to Ruckus Wireless for 10 years. The acquisition cap rate was $28 million, the purchase price was $28 million and the acquisition cap rate was 8.2%. Ruckus provides wireless infrastructure to both enterprise and mobile products. Since closing our acquisition, Ruckus closed its initial public offering enhancing both its access to capital and its financial position.

Also in November, we acquired a personal land located in Tunapuna section of Honolulu, Hawaii containing 49,000 square feet. The property is strategically located to adjacent to land we own and subject to short average remaining lease terms. The acquisition purchase price was $6.3 million or $129 per land square foot and the acquisition cap rate was 3.5% which we expect to substantially grow as we manage through lease expirations.

Also in November, we acquired three single tenant at lease office properties located in Sterling, Virginia containing 307,000 square feet. The properties were 100% leased for 10.6 years to Orbital Sciences and are critical facilities on the company's headquarters campus. The acquisition price was $85.6 million and the acquisition cap rate was 8.3%. Orbital Sciences designs, develops and supports satellites, space systems, missile defense systems and human space flights.

A significant portion of the company's business is with private companies so they are not reliant upon the US Department of Defense for success. In December, we acquired a single tenant net lease office property located in Ann Arbor, Michigan containing 82,000 square feet. The property was a 100% leased to Black & Veatch for 14.9 years. The acquisition price was $16.9 million and the acquisition cap rate was 9.4%. Black & Veatch was founded in 1915 and acquired the world’s largest global engineering, consulting and construction companies.

Also in December, we acquired a single tenant net lease office property located in Columbia, Maryland containing a 120,000 square feet. The property was a 100% leased to the Merkel Group for 10.4 years. The acquisition price was $40.5 million and the acquisition cap rate was 8.7%. Merkel is the largest privately held customer relationship marketing agency in the US and this property is Merkel’s corporate headquarters.

Finally, in January, we acquired through a sale lease back transaction two single tenant net lease office properties located in Addison, Texas containing 554,000 square feet. The properties were 100% leased to Bank of America NA for 13 years. The acquisition price was a $105 million and the acquisition cap rate was 9%. Bank of America is the second largest bank by assets in the US.

In summary, we are pleased with our performance since becoming a separately traded public company in March 2012. What specifically includes demonstrating the ability to grow revenue NOI through rent resets and leasing, successfully acquiring over $500 million of properties with an average remaining lease term of 12.7 years at a weighted average acquisition cap rate of 9.2% and demonstrating solid access to capital through the completion of bank term line in July, the sale of share, common shares in December and the increase of our revolving credit facility to $750 million in February.

We also increased our annual distribution rate by $0.08 per share. As such, we believe that our business strategy of providing a safe and predictable distribution to investors supported by secure income stream remains compelling.

I will now turn the call to John Popeo, our CFO to provide more detail regarding the results.

John Popeo

Thank you, David. Looking first to the income statement for the fourth quarter of 2012, total revenues increased by $9.7 million and real estate taxes and other operating expenses increased by $1.6 million. These increases primarily reflect the acquisition of 16 properties during 2012, plus rent increases from resets in Hawaii.

The increase in depreciation and amortization and acquisition related cost also reflects property acquisitions during 2012. The increase in general and administrative costs primarily reflects additional cost associated with SIR operating as a separate public company plus property acquisitions during 2012.

Operating income increased by 18.9% and EBITDA increased by 34.3% compared to last year. Interest expense reflects amounts outstanding on our $750 million revolving credit facility and our $350 million term loan.

Net income for the fourth quarter of 2012 was $17.2 million which was flat compared to $17.2 million for the fourth quarter of 2011. During the quarter, we executed 10 rent resets for 365,000 square feet resulting in a 59.4% increase in rent.

During the quarter, we entered into new leases and leased renewals for 434,000 square feet at weighted average lease terms of 9.6 years. Aggregate leasing capital for new leases and lease renewals were $0.08 per square foot per lease year. All leasing activity during the quarter occurred in Hawaii and we have no significant lease expirations at our Mainland office and industrial properties until 2015.

During the quarter, we paid $2.2 million for recurring CapEx including leasing capital and building improvements. For 2013, we have 486,000, square feet of lease expirations in Hawaii and we expect to renew or release substantially all of these expiring leases at aggregate rents higher than current in-place rents. Normalized FFO was $0.71 per share for the fourth quarter of 2012. We declared our quarterly common dividend in January 2013 for $0.42 per share.

Turning to the balance sheet, on December 31st, we held $20.4 million of unrestricted cash. Rents receivable of $38.9 million includes approximately $35.6 million of accumulated straight line rent accruals as of quarter end. Deferred financing cost reflects upfront costs associated with our $750 million revolving credit facility and our $350 million term loan.

Other assets include deposits from pending acquisitions; our investment in affiliates insurance company and prepaid operating expenses. Accounts payable and accrued expenses include $8.6 million of environmental reserves at properties located in Hawaii down from $11.5 million as of September 30th. The decrease reflects payments made at our [Kailua Street] property in the [Campbell State]; remediation at this property is now complete. In December, we issued 8,050,000 common shares at a price of $24 per share. Net proceeds of $183 million were used to reduce amounts outstanding under our revolving credit facility and for general business activities.

As of the end of the fourth quarter, we had $95 million outstanding and $405 million of capacity at that time on our revolving credit facility. During February, we partially exercised our option to increase the available borrowing amount under our revolving credit facility from $500 million to $750 million. As of today, we have $200 million drawn on our revolving credit facility and $550 million of borrowing capacity.

Overall, we are very pleased with our quarterly results. We continue to believe we are well positioned for continued growth through the steady flow of Mainland acquisition opportunities and prospects for near-term rent increases at our properties located in Hawaii.

That concludes our prepared remarks. Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will go to the line of Young Koo of Wells Fargo.

Young Koo - Wells Fargo

David, I was wondering if we can get some update regarding Tesoro; I know they abandoned their efforts to sell the refineries in Hawaii and I am just wondering what kind of longer-term impacts do you see from this change in direction in terms of a square footage need for Tesoro going forward?

David Blackman

Yeah, you are correct. Tesoro did abandon the sale of refineries to someone that would operate refineries at that location. My understanding is it is being considering for use at the tank farm. There are a number of stories and some of these on that site today and since there is a capacity or need for various types of refined fuel, I think the plan will be to use that site for storage of refined product and distribution across the Hawaiian arms. I'm not a 100% sure how things progress, when Tesoro on that tank farm, but that's I believe how they are proceeding at this point.

Young Koo - Wells Fargo

Do you see a reduction in terms of their square footage need, because of this change?

David Blackman

Well, remember you know we have three agreements with them. We have the easement which runs through 2019. We have I think a 20-acre parcel of land leased through 2019 and we have a 58 acre parcel leased through 2024. Those parcels that they leased from us aren't heavily used today. The easement is active and so long as they continue to operate storage facility on-site, should remain active. So will they have a growth need for additional space at that location, if they are not operating a refinery, probably not, but it does not have a near-term impact to our company.

Young Koo - Wells Fargo

And then John, the CapEx costs went up pretty substantially in terms of the building improvements sequentially, is there anything going on this quarter and what kind of normalized run rate should we be expecting for 2013?

John Popeo

Yeah, you are correct I mean CapEx for the quarter did run a little higher than the previous three quarters. Its somewhat of a, I guess a trend typically at the end of the year; you’ll typically see a build up of CapEx and other operating expenses coming through just to close out the year. But in this case building improvements includes some projects that were budgeted for the year that just ended up getting done in the fourth quarter including some roof replacements on a handful of buildings that we own in Hawaii now as well as asphalt, speed bump and other sort of infrastructure repairs that needed to get done again mainly in Hawaii. So again it’s more or less, more of a timing issue and that's what you are seeing here in the spike in building improvements this quarter.

David Blackman

Yeah, and those were long lived replacements or repairs. So for the whole amount of improvement out of (inaudible) it’s not something that's going to be recurring annually and we don't own that many buildings in Hawaii, but it just so happens that what we did own, you know, we needed to replace a couple of roots, so again long live replacements, but not something that we expect to be recurring at that level on an annual basis.

Young Koo - Wells Fargo

Okay, thank you for that. And one last question in terms of you balance sheet capacity; you guys acquired $100 million in Q1 so far and another $50 million that’s teed out; what kind of, how can you think about how you are going to funding that going forward if current acquisition velocity remains in place?

David Blackman

Well, let’s see. I mean when I project that what the revolver is going to be and I know this doesn’t answer your question fully, but let me just start with this. If you take into account what you just mentioned, a $105 million acquisition in January, the couple of buildings that we have under contract and lets just say another $100 million, because we do have an active pipeline, but I have to say, it's not as robust as it has been or as we reported on prior calls. You probably end up somewhere, anywhere from $325 million to $350 million out on the revolver and as far as the revolver capacity goes, it's not an issue. You know, we just exercised the accordion and we have $750 million of capacity.

But assuming the variables I just mentioned, in other words, everything that we no longer in disclose plus just add another $100 million which is probably a safe, very safe bet, you are still only up to around 43%, 44% debt to total capital. And at some point, we mentioned this on prior calls we have a lot of variable rate debt on the books right now; we're closing in on our one-year IPO anniversary. We have been maintaining good solid investment grade type credit metrics and at some point maybe this late summer early fall, we may be going into the rating agencies and making a presentation for an investment great rating at that point we will have more options as far as fixing out the term of our variability debt at very attractive pricing at least by today’s standards.

Young Koo - Wells Fargo

Yeah, that partially answers my question. So, should I think you probably go to the unsecured market first before you go back to the FD market?

David Blackman

I think we have available to us the unsecured market at some point during the year, the common market should be available to us at some point and I think the [preferred] market it will be available to us as well. So I think what John was saying we have a lot of capacity right now with our revolving credit facility and as we get closer to needing the type of the capital markets, we will look at common, preferred and unsecured debt as ways to pay down the credit facility.

Operator

(Operator Instructions) Our next question will come from the line of Rich Moore [RBC]. Please go ahead.

Rich Moore - RBC

Going back to the investment grade conversation you are just having. Have you been to the rating agencies yet and sort have done the preliminary shadow rating kind of thing, where you sort of know all the details of what you might be missing at this point to get an investment grade rating?

David Blackman

No we haven’t made a formal presentation for so yet.

Rich Moore - RBC

Okay. So this would be the first, first time you go to them?

David Blackman

Yeah. I mean they are aware of the entity. They know how we run the company because it is a consolidated subsidiary of CommonWealth and CommonWealth of course makes periodic presentations to the agencies. I think that they will pleased.

Rich Moore - RBC

So now you bought something in Hawaii this quarter and I sort of how it was hard to buy in Hawaii that really wasn't anything to get really for anyone almost in Hawaii and I am curious is anything else that you are looking at in Hawaii, is the more possibly to acquire there?

David Blackman

We are not active with anything in Hawaii right now. We saw a couple of opportunities come to market last year. One of which didn't stay, it's the possibility that it could come back around, but we hope that we will have a couple of opportunities in Hawaii annually, there won't be significant in our likelihood.

Rich Moore - RBC

And then as far as the occupancy in Hawaii and the step you have now, I mean that is creeping higher does that closed significantly; do you get substantially higher on the occupancy you think there?

David Blackman

We got pretty good leasing momentum in Hawaii right now. So we have a number of prospects that are looking to vacant sources of land. The economy in Hawaii is performing incredibly well. In fact, 2012 was the best year on record for Hawaii tourism. Visitors increased 6%, spending increased 9%. You also have a major project going on in the Honolulu harbor where military reservation is about 92 acres. It's been expanded and as result tenants in that location are being asked to relocate. So that's creating demand for us in Staten Island, and could create more demand for us in the Tunapuna and on top of that Hawaii is working through the light rail out to west of Wago and that will I think open up the Campbell corridor as well. So I think things are very positive in Hawaii and we would hope to continue to see a tightening in our occupancy out there.

Rich Moore - RBC

Okay, good, thank you and then when you look at the mainland portfolio, what do you see acquisition wise there, is there a lot of product I guess that you are reviewing at this point I mean you obviously had a good fourth quarter, is there a number of potential acquisition opportunities?

David Blackman

Yeah, it’s a pretty robust pipeline. You know interestingly we closed the lot in the fourth quarter, we didn't begin January with a lot of potential opportunities to underwrite, but during January and February that pipeline is building. We are beginning to start to review and underwrite and present items to investment committee. So I would expect we will have a few closings during the first quarter and when we have our earnings call next quarter we will have a few things to talk about. So it’s a good pipeline. Certainly, we wouldn't commit that we are going to do the $500 million of acquisition every year but it’s a good pipeline.

Rich Moore - RBC

And then as far as ball outs in the quarter, I mean did you guys have much that you lost if anything?

David Blackman

In terms of occupancy?

Rich Moore - RBC

Well, in terms of yeah, I mean obviously net occupancy no but did you lose any tenants during the quarter any when they didn't renew or they just lost to other reasons?

David Blackman

We didn't have any material non-renewals during the quarter.

Rich Moore - RBC

And then the last thing, I was going to ask you when we did our calculation on same-store expenses for the mainland, they seem somewhat high and maybe we didn't do it correctly but is that true and if so what specifically might that be?

John Popeo

Well, the same-store total revenues for the quarter is up about 100,000. Same-store NOI was basically flat, which is the equivalent of $100,000 of additional expenses because you understand what I'm trying to say, $100,000 of additional expenses translates into $100,000 of recoveries. It’s hard to really pinpoint specifically where the expenses are going to play out but for modeling purposes, I think the fourth quarter is probably, as good a run rate as any.

Operator

At this time there are no further questions coming from call lines. I would like to pass it back to David Blackman for closing remarks.

David Blackman

Thank you operator and thank you for joining our earnings call. We will be spending (inaudible) Real Estate Conferencein New York next week and hope to see many of you there. That concludes our call.

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